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Passersby were riveted to the financial news
recently below the Scotia Plaza at King and Bay
streets in Toronto’s financial district, as the
credit crisis swept the world. The event will
cause the demise of some firms and create
opportunities for others, accountants predict.
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The heat spilling over
from the global credit meltdown and ensuing financial
upheaval will forge strength in some firms while wilting
others, predicts a leading accounting executive.
“The good firms will
prosper, and the weaker firms won’t,” said James
Mendelssohn, chief executive officer of MSI Global
Alliance in London, England. “It might be a painful
transition but undoubtedly the accounting profession
will come out stronger.”
Everett Colby, principal
of Colby McGeachy, a public accounting and consulting
firm in Almonte, Ont., agreed. “Economic downturns do
not necessarily hurt accounting practices. It may change
the type of work that is done, but I find that the needs
of business clients increase for a variety of items such
as cash flow management, financing proposals, debt
restructuring, tax strategies, etc.”
Today, two forces are at
work on accounting firms, Mendelssohn said. First,
accountants are grappling with greater regulatory
pressure. “The basic cost of regulation is very
significant. You have to swallow those costs or pass
them on to clients.” This is especially true for
mid-tier firms, he added. “They are really struggling.
They can’t justify cost over a relatively small number
of clients.”
Added to that are the
financial firestorms buffeting world markets. “While
economists continue to debate whether or not the U.S.
economy is technically in
recession, it certainly feels
like one to many Americans – especially those facing
home foreclosures and those who lost their jobs,” said
Kip Beckman, principal research associate with the
Conference Board of Canada.
Many firms are now
“finding that because there are so many pressures they
can’t be all things to all people,” Mendelssohn said.
Accountants need to have
a solid understanding of what their clients must do to
weather the economic downturn or, best of all, make hay
while the credit crunch rains.
“Accountants can focus
people on economic issues related to their business,”
said Uwe Manski, president of BDO Dunwoody Limited, the
business recovery and insolvency arm of BDO Dunwoody
LLP, in Toronto. Accounting clients “want the greatest
return for the least effort.”
“We will do what we can
to help clients face the realities,” he added, noting
that this means accountants must help clients understand
how they can keep costs down and better manage their
affairs.
Success is directly
linked to strategy. Accounting firms need to look
closely at the services they provide and the value they
bring to the marketplace, Mendelssohn noted. “Firms that
sit down and work out their focus will do better.
“Buyers will be more critical in the future,” he
cautioned. However, “successful firms will maintain or
increase revenue levels if they find their niche.”
Key to a winning strategy
is actually rolling it out. “Strategy is so much more
than sitting in a boardroom. A strategy is only as good
as its implementation,” said Mendelssohn.
“This is a brave new
world,” he added. “Many firms will really need to start
from scratch.”
Accounting firms will
also have to face the reality their clients are facing,
and adjust accordingly. For example, clients will take
longer to pay, and firms will need to manage their cash
flow better, said Mendelssohn.
At press time the stock
market gyrated and dipped ever lower as fear gripped
global markets amid a deep credit crisis, despite
concerted worldwide efforts to staunch the bleeding.
Given the stark reality,
one key area that will require extra attention from
accountants is credit, said Colleen Gibb, a partner with
the chartered accounting firm Gibb Widdis in Ancaster,
Ont. “Clients should be advised to review their credit
policies. Specifically, watching terms, and evaluating
and re-evaluating who you are extending credit to. In
some cases, it may be better to deny credit and lose the
sale rather than complete it and realize a bad debt.
“Businesses need to know
the
financial health of all of their customers to ensure
that there are no unforeseen surprises,” she added.
Budgeting is another
important consideration. “Clients will be preparing and
updating budgets for the upcoming fiscal years. They may
likely be predicting a decline in sales,” Gibb said.
“With this decline, they should also be watching and
planning on the appropriate level of inventory they
should be maintaining.
“Business also needs to
be aware of concerns from their suppliers, their bank
and other creditors,” she added. “It is usually best to
keep these key players informed.”
It’s not all bad news,
however. There are opportunities for growth and
increased profitability. “You can actually downsize and
become more profitable,” said Manski. “Make sure cuts
are such that the business is protected. You have to cut
flesh, but not bone.”
“With this economy you
probably don’t start new ventures. You hunker down,”
said Manski. “We already have a lot of companies … that
have been hit.”
Cost cutting may be a
necessary option for businesses, advised Gibb. “This is
always a very tough decision as cutting some costs can
seriously impact your business, either today or into the
future. For many businesses, the largest cost is wages
and as such, the first reaction is to lay off part of
the work force.”
That is certainly what is
happening in the U.S. where the credit crunch hit first,
and hit hardest. According to the U.S. Department of
Labour, in August, employers took 1,772 “mass layoff
actions.” Each “action” involved at least 50 people from
a single employer; the number of workers involved
totaled 173,955, on a seasonally adjusted basis – the
highest level for the month since 2001.
In the manufacturing
sector alone, approximately 15,000 workers lost their
jobs in August. In all, roughly 1.275 million people
have been laid off in the first eight months of this
year.
Layoffs may make sense in
the current climate, but the accountant’s job is also to
forecast what lies ahead. “The economy is cyclical and
when the economy starts booming, where will (clients)
find the talent that they require?” asked Gibb, noting
that accountants need to help their clients with this
question.
Getting answers is a key
role for accountants, especially in an economic
downturn. “The client has to determine the costs; they
understand the business better than the accountant. But
the accountant has to question things,” said Manski.
Accountants also have to
be aware of opportunity as well as necessity. “A
faltering economy is a huge opportunity for successful
businesses,” said Gibb. “As competitors shrink, they can
be gaining market share.
“Businesses who
understand their customers can adapt to assist them and
perhaps increase revenues even in bad times,” she added.
That appears to be the
case in many developed countries. For example, a new
poll from COA Solutions Ltd., a business management firm
in the UK, found that 75 per cent of UK organizations
surveyed predict they will actually prosper during the
economic downturn.
It’s not simply
information that accountants must provide to their
clients, however, it’s guidance.
“Clients will need help
managing the business and handling cash flow. The
margins are going to be squeezed,” said Mendelssohn.
“The most common
(problem) is not reading the economic signs early
enough,” noted Manski. “It’s human nature to be
optimistic and to go along with the tried and true.”
Accountants need to
recognize those signs in tandem with their clients – and
will often have to open clients’ eyes to the signs.
“People don’t want to
change downward. They don’t want to take corrective
measures. It’s a sign of being unsuccessful. The
external advisor has to focus you on what needs to be
done,” Manski stressed.
According to
Rick Erling, president of
The CxO Group, LLC, a
Dallas-based
business coaching company, firms must pave
the way for increased business. “At times like these
many companies prefer to move into a survival strategy
to ride out the storm. Survival strategy, while
conservative, has one underlying problem,” he noted. “In
today’s hyper-connected economy things can unravel
quickly, and when your business is not growing and
improving it is falling behind and headed for
extinction.”
For accounting firms, the
road to greater revenue starts with existing clients.
“As long as the client remains in business, even if it
is slow, they are typically still required to prepare
financial statements and file tax returns,” said Colby.
“So that volume of work does not decrease due to
economic downturns” unless clients fold.
Business may be
slow now, but it “will return to profitability in the
future if you do what is necessary to survive today,”
noted Erling.
And, the accounting
profession appears to be somewhat insulated from
economic shocks. According to a survey from the Mclean,
Virginia-based Jobfox, an Internet job site, accounting
positions are among the top five recession-proof jobs.
That ranking is supported
by the U.S. Labor Department, which projects 18 per cent
growth between 2006 and 2016 in the job count for
accountants and auditors combined – faster than the
average for all other occupations. The Labor Department
also predicts an additional 226,000 accounting jobs will
be created in the U.S. alone during this period.
“Ultimately,” said
Mendelssohn, “there is more work to be had. It’s just
different work – not all accountants can transform.”
See this article at
The Bottom Line News
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